Additionally, she believes hospitals are actually incentivized to put patients in observation status so they won't count as an inappropriate readmission if the patient had previously been in the hospital.
"As more hospitals begin to create observation units, the quality of care will decline even further for beneficiaries because people will see they are there only for observation, as opposed to being an inpatient," she said.
Last week's listening session was called by Jonathan Blum, deputy administrator and director for CMS' Center for Medicare, in part because the agency has noticed a "small but growing trend in (hospitals') use of observation status that is of concern to the agency," he said.
"We're here to understand why this trend is growing, and how can CMS better educate beneficiaries."
Some of those speaking at the session asked for changes to Interqual and Milliman guidelines used by hospitals to determine what illnesses should result in a patient's hospitalization.
Others suggested Medicare stick with the observation category, but roll it in to help patients qualify for followup coverage under the three-day rule.
"Stay determination should not be made based on a list or a fear of a claim denial," said a representative from the American Healthcare Association.
In a joint address during the listening session, Roslyne Schulman, director for policy the American Hospital Association, spoke on behalf of the Association of American Medical Colleges and the Federation of American Hospitals. She said the three organizations think because CMS is becoming more strict about which patients merit admission, many more kinds of care are considered appropriately provided in an outpatient or observation setting.